Legacy Challenges

As a follow up to last week's newsletter, Breached, the Equifax breach likely will have regulatory effects on FinTech that go beyond the credit-scoring business itself. In an ironic but not unsurprising development, legacy institutions questioned new technologies in relationship to legacy problems.

Last week's Senate Banking hearing on FinTech, held in the wake of the Equifax breach, not surprisingly focused on security and data use. "Democrats led by Ranking Member Brown (D-OH) warned that the Equifax breach not only underlined the need for increased emphasis on data security, but also the importance of examining alternative underwriting data that may be of limited value and vulnerable to hacks," reports Karen Shaw Petrou, managing partner, Federal Financial Analytics, a Washington, DC-based advisory firm.

How alternative underwriting data became a focus in this situation is beyond me. Quartz didn't mention it in its "Complete Guide to the Equifax Breach."

It's important because a shift in focus to things like alternative data serves to maintain the legacy systems and business processes that led to the breach. And the FinTech firms that both threaten financial institutions and could help provide technology solutions rely on the "alternative" as the key parts of their systems.

For instance, Joe DeCosmo, chief analytics officer, at Enova, an online (or alternative) lender, points out that regulators are skeptical of new technologies and techniques. That makes it difficult to roll out new analytic software that uses machine learning and alternative data, especially when regulations vary by state.

Yet alternative data includes things like rent and utility payments, not the often derided social-media stats. "It's not in credit reports so it must be alternative," he quipped during a panel last week at the Chicago INFORMS Midwest Practice of Analytics Conference.

The guardians of the existing financial system put down another transformative FinTech force. In a widely reported comment, JP Morgan Chase CEO Jamie Dimon called bitcoin a bubble "worse than tulip bulbs."

The most even-handed analysis from a legacy point of view that I've seen comes from Mohamed A. El-Erian, chief economic adviser at Allianz SE, the parent company of Pimco. A couple excerpts from his Bloomberg View column, "What last week tells us about bitcoin:"

“Enabled by technological innovations that promise greater efficiency and will likely deepen over time, cryptocurrencies are also a response to the wider phenomenon of dissatisfaction with existing institutions, both public and private. . .

“As such, we should expect continued high price volatility in the context of persistent loud differences of opinion as to what comes next. Over the longer term, a more stable and regulated platform will likely emerge. It will supplement but not replace the traditional system managed by central banks.”

I think that means regulators and existing financial institutions will work to co-opt digital currency technologies.

Along the same lines, the acting head of the U.S. Office of the Comptroller of the Currency compared FinTech to dating during a panel at Finovate Fall in New York.

"The Office of the Comptroller of the Currency is still courting fintech companies as the two continue to get to know each other better and plan their future together," reports Stephanie Forshee in Corporate Counsel. The OCC apparently is backing off its flirtation last March, in the form of a proposal to offer FinTech firms a special banking charter.

"So far, it is only a proposal and [Noreika] gave no indication that there are immediate plans to push it further forward. Regulators continue to have conversations with companies to better understand their needs and to educate the fintechs about the laws and regulations within the industry."

For a look at the latest FinTech solutions, see the best-of show winners at Finovate Fall 2017.

"These are the technologies that we increasingly turn to for help when it comes to saving and investing for the future, working better and more efficiently with our banks and credit unions, and safeguarding our property, our financial transactions, and even our identities against fraudsters, hackers, and other malevolent actors," writes Finovate's David Penn.

They sound like good alternatives to me.